fasb/iasb update

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John Brozovsky

[email protected]

FASB/IASB UPDATE

2010 AAPA Port Finance Seminar

Norfolk Virginia

June 8-10 2010

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Codification

IFRS

Convergence

SEC Roadmap

Private company (SME) reporting

Proposed standards

Outline

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Codification

Went live as US GAAP on 7/1/2009

Numerous updates since that time

– 17 in 2009 (after the 7/1 implementation date)

– 18 in 2010 as of May 30

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No. 168: The FASB Accounting Standards CodificationTM

and the Hierarchy of Generally Accepted Accounting

Resources available

– An online tutorial available on the Codification website at http://asc.fasb.org

– A Notice to Constituents that includes a significant amount of background information at http://asc.fasb.org

– A Codification Question and Answer (Q&A) document at http://www.fasb.org/cod_project/Cod_overview_12-08.pdf

– Various webcastshttp://www.fasb.org/fasb_webcast_series/index.shtml

http://asc.fasb.org/

http://asc.fasb.org/

http://www.fasb.org/cod_project/Cod_overview_12-08.pdf



http://www.fasb.org/fasb_webcast_series/index.shtml

http://www.fasb.org/fasb_webcast_series/index.shtml

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No. 168: The FASB Accounting Standards CodificationTM

and the Hierarchy of Generally Accepted Accounting

Resources available

– Countdown to Codification Alerts, http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176155830152

– Details about the availability of the Codification, including subscription information and a planned print edition, are available at http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176156264264

http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB/Page/SectionPage&cid=1176155830152






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Codification

More significant Update titles (2009)

– Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value

– Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities

– Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

– Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements

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Codification

More significant Update titles (2009)

– Software (Topic 985): Certain Revenue Arrangements That Include Software Elements

– Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing

– Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets

– Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities

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Codification

Update titles (2010)

– Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash

– Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification

– Extractive Activities—Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures

– Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements

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Codification


– Not-for-Profit Entities (Topic 958): Not-for-Profit Entities: Mergers and Acquisitions

– Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements

– Consolidation (Topic 810): Amendments for Certain Investment Funds

– Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives

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Codification


– Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades

– Financial Services—Insurance (Topic 944): How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

– Entertainment—Casinos (Topic 924): Accruals for Casino Jackpot Liabilities

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Codification


– Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition

– Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset

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Proposed Accounting Standards Updates

Proposals in 2010:

– Proposed Accounting Standards Update—Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815)

– Proposed Accounting Standards Update—Health Care Entities (Topic 954): Measuring Charity for Disclosure

– Proposed Accounting Standards Update—Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries

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Proposed Accounting Standards Updates

Proposals in 2010

– Proposed Accounting Standards Update—Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

– Proposed Concepts Statement, Conceptual Framework for Financial Reporting: The Reporting Entity

– Proposed Accounting Standards Update—Financial Services—Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

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Conceptual framework

Proposed statement issued jointly with IASB

– 3/11/2010

– Comments due by 7/16/2010

Likely to be elevated to authoritative status

Entity concept

Concept of control – consolidation required if an entity is

controlled

– Specifics of what constitutes control is left to the standards

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IFRS

SEC Roadmap

– No longer needs 20F reconciliation (2007)

– Voluntary use of IFRS by US registrants in 2010. Limited number of firms.

– Mandatory use phased in 2014/2015/2016

– Reassess whether to continue in 2011

New SEC scuttlebut:

– Encourage convergence will reassess in 2011

– Closest time anyone is now talking about is 2016

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IFRS

Convergence

– May 26, 2010: Delayed until the end of 2011

Major areas to converge

– Financial statement presentation

– Leases

– Revenue recognition

– Financial instruments with characteristics of equity

– Accounting for financial instruments

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IFRS

Major areas to converge (continued)

– Consolidation: Policy and procedures

– Insurance contracts

– Statement of comprehensive income

– Reporting discontinued operations

– Balance sheet offsetting

– Fair value measurement (due Q4 2010)

– Emissions trading schemes (due date TBA)

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IFRS

Private Company Accounting (IFRS for SMEs)

Simplified accounting for companies with no public

reporting requirements

Single stand alone standard

AICPA allowable standard to audit against

Less than 250 pages

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Proposed Guidance

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Conceptual Framework

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Qualitative Characteristics:

– Relevance (predictive, feedback) nothing about timeliness

– Faithful representation (complete, neutral, free from material error) nothing about verifiability

Enhancing characteristics (comparability, verifiability

[implies that different knowledgeable and independent

observers could reach general consensus on how to

report], timeliness, understandability)

Constraints (cost, materiality)

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Definitions

– Asset: An asset of an entity is a present economic resource to which the entity, through an enforceable right or other means, has access or can limit the access of others

– Liability: A liability of an entity is a present economic obligation that is enforceable against the entity

– Equity: Under discussion

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Financial Statement Presentation

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Proposed Sections

• Business further broken down into Operating and Investing categories

• Financing further broken down into Financing Asset and Financing Liability categories

• Income Taxes

• Discontinued Operations

• Equity (Note: No Extraordinary Items Section)

Primary perspective: Distinguishing between an entity’s ―value creating‖ (business) and ―funding‖ (financing and equity) activities

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Cohesiveness is the governing principle

Classification of assets and liabilities drives classification of

changes in those items in

• The statement of comprehensive income

• The statement of cash flows

Classification based on how an entity manages its business

• Explain, as a matter of accounting policy, basis for classifying assets and liabilities

Benefit: Clarifies relationships among financial statements’

line items; facilitating financial analysis

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Cash flow statement

– Direct method required

– Reconciliation of net income to cash flow from operations also required

Single statement of Comprehensive Income

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Statement of

Financial Position

Statement of

Comprehensive Income

Statement of

Cash Flows

Business

•Operating assets and

liabilities

•Investing assets and

liabilities

Business

•Operating income and

expenses

•Investing income and

expenses

Business

•Operating cash flows

•Investing cash flows

Financing

•Financing assets

•Financing liabilities

Financing

•Financing asset income

•Financing liability expenses

Financing

•Financing asset cash flows

•Financing liability cash

flows

Income taxes Income taxes Income taxes

Discontinued operations Discontinued operations net

of tax

Discontinued operations

Equity

OCI net of tax

Equity

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Lessee Accounting

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Lessee Accounting

Convergence project with IASB

Discussion paper comment period ended 7/17/2009

The right to use is to be considered an asset (note the

new conceptual framework matches this definition)

Obligation to pay rentals is a liability

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Lessee Accounting

Whether a purchase option will be exercised will be

reassessed each reporting period date. Changes the

reassessment makes in the obligation to pay is

recognized as an adjustment to the carrying amount of

the right-to-use asset

Obligation to pay includes contingent rentals remeasured

each reporting date

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Lessee Accounting

Initial measurement

– Liability valued using a discounted cash flow approach (approximates fair value)

– Discounted using lessee’s incremental borrowing rate

– Initial asset measured at cost (discounted cash flow)

Subsequent measurement

– Liability at amortized cost (discount rate not reassessed)

– Right to use asset at amortized cost

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Lessee Accounting

Changes in estimated lease payments

– Catch up approach (bring up to date for the changes using the original discount rate)

Impairment: not yet determined

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Lessee Accounting

Options to extend or terminate the lease, or purchase

– A recognition issue rather than a measurement issue

– Recognize the most likely lease term option, (IFRS probability weighted expected value)

– Consider contractual, non-contractual and business factors

– additional disclosure to allow users to differentiate

– Lease term reassessment each reporting date on the basis of any new facts or circumstances

– Change in liability recognized as an adjustment to the right-to-use asset

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Lessee Accounting

Contingent rentals and residual value guarantees

– Most likely outcome (IFRS expected, probability weighted)

– Remeasured at financial statement date through profit and loss (IFRS adjust the asset account)

Residual value guarantees

– Most likely outcome (IFRS expected, probability weighted)

– Remeasured at financial statement date through profit and loss (IFRS adjust the asset account)

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Lessee Accounting

Presentation

– Separate presentation of right-to-use assets (IFRS will not require separate presentation)

– Presented based on classification of the underlying asset

– Income statement presentation: depreciation, amortization, interest expense

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Revenue Recognition

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Revenue Recognition

Applies to contracts with customers

– Contract is an enforceable obligation (written or oral, explicit or implicit)

– Customer is a party who contracts to obtain an asset from the entity’s ordinary activities

Some possible scope exclusions

– Derivitives

– Insurance contracts

– Lessor accounting for leases

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Revenue Recognition

Revenue recognized on the basis of increases in an

entity’s net position in a contract with a customer

– Occurs when an entity performs by satisfying an obligation in the contract

– Account for each obligation separately if transferred to the customer at different times

– Revenue represents the transfer of assets to the customer

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Revenue Recognition

Satisfaction of a performance obligation

– Asset transferred when customer obtains control of the underlying asset

– Goods this is typically physical possession

– Services when customer receives the contracted services

– Activities are revenue ONLY IF they simultaneously transfer assets to the customer

– Performance by customer does not lead to revenue recognition by the entity

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Revenue Recognition

Satisfaction of a performance obligation

– Customer acceptance can affect when an asset is transferred to the customer

– Customer control of an asset rather than the customer’s ability to use the asset as intended is the transfer point

– Goods are generally transferred at a point in time while services may be continuously transferred

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Revenue Recognition

Measurement

– Initially measured at transaction price

– Subsequent measurement is entity’s obligation to transfer goods and services

– Revenue recognized is the amount of the transaction price allocated, at contract inception, to the satisfied performance obligations

– This is not updated unless the contract is deemed onerous

– Deemed onerous when costs exceed revenue-revise up to costs through profit and loss

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Revenue Recognition

Effects on current practice

– Increases in inventory in absence of a contract is not revenue (agriculture, extractive industries)

– Increases in inventory under a contract not yet transferred to a customer is not revenue (construction)

– Warranties and sales incentives are deliverables requiring separate revenue recognition (not cost accruals)

– Estimates must be used, based on stand alone selling prices (this counters EITF 00-21 and AICPA SOP 97-2)

– Cost of obtaining contracts are expensed unless they qualify specifically under a different standard

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Financial Instruments with Characteristics of Equity

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Issued November 2007 but still under deliberations

Basic Ownership model

Characteristics of Equity

– A claim to a share of the assets in liquidation that have no priority over any other claim

– Is entitled to a percentage of the assets that remain after all higher priority claims have been satisfied

– Has no upper or lower limit

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Not Equity

– Perpetual instruments (e.g., some preferred stock)

– Senior classes of common stock

– Limited partnership interest

– Redeemable instruments (other than at fair value)

– All equity derivatives (regardless of settlement provisions)


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Exceptions – redeemable instruments

– Perpetual redeemable instruments equity if

Redemption amount equals share of net assets in liquidation

Redemption doesn’t impair the claims of higher priority instruments

– Includes mandatorily or at the option of the holder and at fair value or an approximations of fair value

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Impact on balance sheet

– More items classified as liabilities

– Entities will appear significantly more leveraged

– Debt covenants may need to be renegotiated

– More instruments that need to be fair valued

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Impact on income sheet

– Dividends on preferred stock expenses through earnings (reduced net income)

– More contracts fair valued through earnings (potentially increased volatility in net income)

– Gains on some contracts as value of liability decreases

– Decrease demand for derivatives indexed to common shares

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Impact on Financial Analysis

– Leveraged debt-equity ratios

– Potentially more volatile performance measures

– Subjectivity in determining fair values

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Financial Instruments

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Most financial instruments at fair value

Amortized cost also relevant and also presented

Derivatives and trading financial instruments fair valued

through income

Instruments held for collection or payment:

– reconcile fair value to amortized cost

– If according to business strategy change in fair value through OCI with changes from interest accruals, credit impairment and realized gains and losses in net income

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Many financial liabilities of financial institutions kept at fair

value

Derivatives only need a qualitative assessment of

hedging effectiveness makes hedging easier to qualify for

Eliminates short cut method and critical terms match

method

Discontinue hedging only if criteria no longer met

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QUESTIONS?

Email: [email protected]

540 231 5971

mailto:[email protected]

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FAS No. 164: Not-for-Profit Entities: Mergers and Acquisitions

Determines whether a combination is a merger or an

acquisition

Applies the carryover method in accounting for a merger

Applies the acquisition method in accounting for an

acquisition, including determining which of the combining

entities is the acquirer

Determines what information to disclose to enable users

of financial statements to evaluate the nature and

financial effects of a merger or an acquisition.

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No. 164: Not-for-Profit Entities: Mergers and Acquisitions

This Statement is effective for: Mergers and acquisitions

for which the merger/acquisition date is on or after the

beginning of an initial reporting period beginning on or

after December 15, 2009. It may not be applied to

mergers or acquisitions before those dates.

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Also effective prospectively for Not-for-profit entities for fiscal

years starting on or after 12/15/2009

– Statement 142’s requirements on subsequent accounting for goodwill and other intangible assets acquired in an acquisition by a not-for-profit entity (Statement 142 refers to assets acquired in a business combination.)

– The amendments that FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, made to Accounting Research Bulletin ARB No. 51, Consolidated Financial Statements, and to other existing pronouncements

– The amendments that FASB Statement No. 141 (revised 2007), Business Combinations, made to existing pronouncements.

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This Statement does not apply to:

– The formation of a joint venture

– The acquisition of an asset or a group of assets that does not constitute either a business or a nonprofit activity

– A combination between not-for-profit entities, businesses, or nonprofit activities under common control

– A transaction or other event in which a not-for-profit entity obtains control of another entity but does not consolidate that entity, as permitted or required by AICPA Statement of Position 94-3, Reporting of Related Entities by Not-for-Profit Organizations, or AICPA Audit and Accounting Guide, Health Care Organizations.

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Applying Carryover method

– Done at measurement date when the combination is effective not at the beginning of the period

– Carried at book value with exceptions made to reflect consistent methods of accounting for the new entity if the merging entities used different methods and for the effects of intra-entity transactions

– Effectively new entity accounting at point of merger

– Carry forward in opening balances items such as hedge accounting requirements unless: 1. The merger results in a modification of a contract in a manner that would change those previous classifications or designations. 2. Reclassifications are necessary to conform accounting policies

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Applying the acquisition method

– Starts with FAS 141R and adjusts for non-profit specifics

– Not-for-profits primarily supported by contributions and investment earnings should write off as a separate charge in the current periods what would otherwise be classified as goodwill asset

– Provides guidance on the measurement and presentation of non-controlling interest (FAS 160 base)

– Provides exceptions to the recognition principle for donor relationships, collections and conditional promises to give


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Applying the acquisition method

– Provides guidance on how to present in the statement of activities and the statement of cash flows things like: inherent contribution received, specific items that are to be with the performance indicator in the health care guide.

– Includes minimum disclosure requirements tailored to not-for-profit entities

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Accounting Standards Update

No. 2009-06

Income Taxes (Topic 740)

Implementation Guidance on Accounting for Uncertainty

in Income Taxes and Disclosure Amendments for

Nonpublic Entities

– Clarify when tax is attributable to the entity or to the owners

– Determination of taxable status is a tax position

– Reduced disclosure requirements for non-public entities

fasb/iasb update

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